SRD II compliance extends beyond the EU, its impact extends globally to all organisations that manage shares in an EU based country. Therefore, it is vital to fully understand if your organisation is in scope and the steps needed in order to comply.

This directive deeply affects Corporate Actions management within the shareholders communication process for providers of securities services.

Why the Shareholders Rights Directive II is welcomed by corporates and shareholders alike?

SRD II (The Shareholder Rights Directive II) is welcomed by corporates and shareholders alike and is seen as a positive step forward to improved investor relations. It also has the potential to have an industry-changing, progressive impact outside its current remit, leading to expectations from shareholders beyond the EU and also for other securities products. For example, Italy has put corporate bonds into scope, and many intermediaries are planning to roll out the same transparency and inclusion for their asset servicing globally.

The EU recognised this need for more transparency within the securities sector.

However, there was still considerable pressure from the banks to delay the deadline as they built a case based on poor levels of readiness, busy roadmaps, Brexit and the impact of COVID-19. The EU acknowledged that Banks and intermediaries had a stiff challenge in meeting regulatory/industry mandates, preparing for PSD2 and offering innovative products such as Instant Payments and SWIFT gpi. Regardless, they remained steadfast in their commitment to bring in this new regulation in September 2020. This drive was partly due to how SRD II centers around shareholder engagement in the longer term, an essential element in addressing the bumpy market conditions.

Building a platform for the future

SRD II was set up in the wake of industry scandals such as the Panama Papers and the subprime crisis. It was a time when shareholders didn’t have suitable visibility and influence on their investments or the markets in which they were investing. As a result, the European Council deemed it necessary to introduce several measures that would provide the required level of insights and influence for investors.

Additionally, Asset Managers would often have complex investment structures and strategies that investors didn’t fully understand. Under SRD II conditions, Asset Managers will now have to document and publicise their investment strategy. This information provides greater visibility and information for shareholders to make better, more informed decisions.

Enabling shareholders to vote on Director’s Remuneration under SRD II conditions is significant. It inspires shareholder confidence and provides real clarity on the companies they are investing in. By being more transparent with corporate governance, we could even anticipate the SRD II principles being extended in the future with other topics being in scope for voting, to enhance direct communication and visibility between corporates and shareholders. 

As per SRD II, it suggests companies are more transparent about their governance. This openness results in a higher governance rating, creating a competitive advantage over companies whose governance is less readable.

Finally, giving individual investors the chance to vote on issues such as Director’s Remuneration is an essential step in avoiding any future scandals and creating a new platform for investor confidence.

What have been the “pain points” for SRD II?

Despite the issues raised, the cost of implementation, busy regulation roadmaps and developing products, SRD II has the potential to revolutionise corporate investment and inspire investor confidence.

Compliance Confusion

Confusion over who is included in SRD II remit

There was initial confusion about which financial institutions needed to comply with SRD II and indeed to what extent, amongst third party firms operating outside the EU. However, this is now clarified, and in terms of scope concerning processes, meetings and securities, the defining factor is the location of the issuer’s registered office address. If the intermediary is a global custodian, sub-custodian, CSD, broker or wealth manager, and performs such administrative services outside of Europe, but holds listed European securities on behalf of its clients, then SRD II applies. This clear definition becomes more vital when faced with potential fines for non-compliance, Italy, for example, firms might be fined up to €5m for failing to achieve the shareholder identification procedure, while in Austria, it is €25,000 per breach.

Simple Administration Illustration

Cost and Time

The cost and time needed by intermediaries to implement SRD II and be compliant

Whilst allowing shareholders to vote will not be unfamiliar for French or UK shareholders, for the majority of the Member States or third-countries, this is a new condition. Under SRD II conditions, the requirement is the ability to forward general assembly meeting notices or requests for disclosure to the chain of intermediaries on the same day. However, many intermediaries are not used to this level of agility and rely mainly on manual processes for corporate actions processing. Now they need to cater for automated “straight-through processing” and build the functionality from zero.

Shareholder identity data and shareholder communications must be shared in a machine-readable messaging format. However, the problem is that electronic machine-readable messaging is not defined clearly in the regulation. Even if “ISO” appears in the Directive, there is a lack of detail. Either way, ISO 20022 and the rails to transport it, has yet to be adopted by many financial institutions and requires a separate implementation in itself.

Faster Investigations Illustration

Data Security

Sharing data securely

To disclose shareholder identities (a key requirement of SRD II), you need to be able to transfer the customer identification data across borders to the corporate headquarters or its representative via SWIFT or other rails. This data transfer causes issues for some countries such as Luxembourg and Switzerland, with strong data confidentiality policies. Therefore, there needs to be an emphasis on encryption and trust between parties that the data will be used for the requirements of SRD II only, and not for other purposes that could expose it to fraud or data breaches.

ERP Integration Accounts Payables Automation Illustration

Why it matters?

Companies that are more transparent about their governance will have a higher rating and create a competitive advantage over those whose governance is less readable.


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